Tax Guidance for Tennessee Residents in 2025
Tennessee's Tax System: A Comprehensive Guide
Tennessee, known as the Volunteer State, offers a unique tax system that attracts residents and retirees alike. Here's a breakdown of the key components of Tennessee's tax system:
Income Tax
Residents of Tennessee enjoy a significant advantage as the state does not impose a state-level individual income tax. This means that residents do not file state individual income tax returns. However, Tennessee LLCs are subject to certain business-related taxes like Business Tax, Franchise Tax, and Excise Tax [1][3][5].
Sales Tax
Tennessee has a statewide sales tax of 7%, with localities adding up to an additional 2.75%. This results in an average combined rate of about 9.56%, giving Tennessee the second-highest sales tax rate in the nation [3][4].
Property Tax
Tennessee's property tax rates are below the national average, with an effective rate of about 0.49% [3][4]. The state offers property tax relief programs for seniors (age 65+), veterans with disabilities, and their surviving spouses. Additionally, some residents can qualify for a tax freeze that prevents assessment increases under certain conditions [3][4].
Retirement Income Tax
Tennessee does not tax retirement income, including Social Security benefits, pensions, and distributions from 401(k)s or IRAs [3].
Gas Tax
Tennessee funds parts of its transportation infrastructure through taxes on motor fuel (gasoline). The exact rate was not specified in the search results, but motor fuel is taxable in the state and subject to relevant excise taxes that contribute to state revenues [3][4].
Other Taxes
- Groceries, clothing, prescription drugs, and motor vehicles are taxable in Tennessee.
- There is no state tax liability on retirement income in Tennessee.
- The tax on cigarettes in Tennessee is $0.62 per pack, and other tobacco products are taxed at 6.60% of the wholesale price.
- The tax on wine in Tennessee is $1.21 per gallon, beer is taxed at $1.29 per gallon, and liquor is taxed at $4.40 per gallon.
- There is no estate tax or inheritance tax in Tennessee.
Special Programs
- Veterans with disabilities and their surviving spouses (of any age) might also qualify for the Tennessee property tax relief program.
- There's also a property tax freeze program available for eligible Tennessee residents, preventing tax increases in following years.
Sources
The data for this state tax guide was gathered from various sources including the Census Bureau, the state's government website, and the Sales Tax Handbook.
This tax profile makes Tennessee attractive for retirees due to no income tax on retirement income, but residents face relatively high sales taxes [1][3][4][5]. The average effective property tax rate in Tennessee is 0.49%, according to the Tax Foundation, making it a state with relatively low property taxes compared to the national average.
In the context of Tennessee's Tax System, personal finance considerations suggest that while retirees may find the absence of income tax on retirement income appealing, the relatively high sales tax rates should be carefully weighed before making a decision to move to the state. Additionally, it is worth noting that business owners may still have to pay various taxes on their Tennessee LLCs, such as Business Tax, Franchise Tax, and Excise Tax.
